Shared Value in Extractives Next-Gen CSR and Shared Value Forum Calgary, Alberta February 2014 Boston Geneva San Francisco Seattle Washington FSG.ORG
The Extractives Sectors Present a Significant Opportunity for Impact in Society $3.5 trillion in annual gross revenues (5 % of global GDP in 2012) 3 of the world s 10 biggest companies 3.7 million people employed by the mining sector alone Operations increasingly located in poor or developing countries Provide critical economic development opportunities in emerging, resourcerich countries 2
Oil & Gas and Mining & Metals Companies Face Similar Challenges What is common about extractives? Upstream footprint determined by reserves, which are often in remote areas with major societal needs Massive inflow of capital, often dwarfing local economies Long-term time horizon for operations, including remediation Multiple points of interaction with local communities Legal requirements governing investment in societal issues (e.g., local content, infrastructure, education) The similarities across these sectors, particularly in the way in which they relate to local communities, create opportunities for common learning 3
2005 2006 2007 2008 2009 FSG.ORG From a Business Perspective, Extractives Companies Lose Billions at the Asset, Country, and Company Level to Community Strife Cerro Matoso, BHP Billiton Nigeria, Petroleum Exports, 2005-2008 Pascua Lama, Barrick Gold 2.4 2.3 2.2 2.1 2 1.9 1.8 Exports (mbpd) US$700M compensation claim Disruptions dropped production by 18% Share price plunged nearly 30% in 2 months 4% of world output of ferronickel halted Tens of millions of dollars in lost revenue a day The behaviors of communities and governments that lead to these negative business outcomes are considered part of non-technical risk 4
Companies Respond to this Strife By Attempting to Address the Proximate Triggers of Community Tension Non-Technical Risk Protests Permit delays Community disruptions Refusal to grant access to land Moratoriums Increased community demands Visible Causes Political agendas Demands from local influencers Unrealistic community expectations Community opposition to operations Negative media coverage Addressing the high-visibility triggers can reduce some community risks facing companies temporarily, but often will not address it completely nor does it create long-term competitive advantage 5
Philanthropy and Corporate Social Responsibility Have Been the Dominant Approaches by Business to Community and Social Engagement Philanthropy Donations to worthy social causes Volunteering Corporate Social Responsibility (CSR) Compliance with community standards Good corporate citizenship Sustainability Mitigating risk and harm Improving trust and reputation Sample activities: Create employee volunteer program Fund a health clinic Sample activities: Plant trees to offset a company s carbon footprint Support microfinance NGOs in the community These investments in social issues allow companies to be a good corporate citizens and address some community expectations 6
Existing Approaches to the Management of Non-Technical Risk Have Led to Mixed Results at Best People tend to manage social engagement and risk through denial. They only get involved with philanthropic programs to offset the risk, and they promote only the stakeholder activities that are aimed at brand promotion and information dissemination that don t actually impact the risks. There is no correlation (and sometimes an inverse correlation!) between the amount of money companies spend on community projects and the health of company-community relations. From a community perspective, you assess your risk and invest in community activities to get you over that line. When I talk about wielding influence in economic development, [corporate leaders] are not interested. They are much more interested in bragging rights. They are driven by reputation rather than risk mitigation objectives. If you look at this from a sheer NPV perspective, you do the minimal necessary to get you to a positive NPV and acceptable risk profile. There is no evidence that successful stakeholder relations are linked to the budget for Social Investment activities. - Quotes from industry reports and extractives industry insiders 7
A Risk Management Approach Is Not an Effective Long-Term Community Engagement Strategy Investments Based on lead to Community wish lists Placating loudest voices in community Short-term reputational boosters Targets for dollars disbursed Seeking PR credit for community engagement activities Chasing moving targets in terms of requests Making unilateral investments that have limited impact Prioritizing image over outcomes Teaching the community to use dollars spent as the metric to evaluate investments Missing the greatest community needs and business opportunities None of these approaches address the root causes of societal needs or help identify the link with the business 8
Addressing the Underlying Root Causes of Community Concerns Is the Only Real Solution Non-Technical Risk Protests Permit delays Community disruptions Refusal to grant access to land Moratoriums Increased community demands Visible Causes Political agendas Demands from local influencers Mismatched expectations Activist opposition to operations Negative media coverage Underlying Causes Lack of economic opportunity Poor community health Civil strife Political instability Environmental issues 9
Addressing the Underlying Root Causes of Community Concerns Is the Only Real Solution Non-Technical Risk Protests Permit delays Community disruptions Refusal to grant access to land Moratoriums Increased community demands Visible Causes Political agendas Demands from local influencers Mismatched expectations Activist opposition to operations Negative media coverage Underlying Causes Lack of economic opportunity Poor community health Civil strife Political instability Environmental issues Opportunities to Create Business Value Reduced costs of FIFO workforce Cost savings through local suppliers Better trained local workforce More efficient local business environment In addition to leading to new opportunities, addressing root causes can minimize the effect of surface drivers of tension with communities 10
Shared Value Can Complement and Reinforce Existing Philanthropy and CSR Programs, but Is Fundamentally Different Philanthropy Donations to worthy social causes Volunteering Corporate Social Responsibility (CSR) Compliance with community standards Good corporate citizenship Sustainability Mitigating risk and harm Improving trust and reputation Creating Shared Value (CSV) Policies and practices that measurably improve business performance (i.e. decreased operational costs, improved productivity, and/or a stronger business environment) by addressing core societal needs in and around extractives operations 11
CSR versus Shared Value Fair Trade CSR CSV Fair Trade Paying a higher price to farmers for the same products Certification as a fair trade company Transforming Procurement Collaborate with farmers to improve quality and yield Supporting investments in technology and inputs Higher prices for better quality Higher yield increases quantity produced Environmental impact also improved 12
Opportunities for Shared Value Energy Efficiency Environmental Improvement Education Water Use Company Productivity Workforce Skills Community Economic Development Health Affordable Housing Worker Safety Social deficits and environmental impact create economic costs for companies Community weaknesses affect company productivity Social needs represent the largest unserved market opportunity 13
Levels of Shared Value I. Reconceiving needs, products, and customers Meeting societal needs through products Serving unserved or underserved customers II. Redefining productivity in the value chain Utilizing resources, energy, suppliers, logistics, and employees differently III. Improving the local and regional business environment Improving skills, the supplier base, the regulatory environment, and supporting institutions that affect the business Strengthening the cluster on which the company depends Strengthens the link between company success and community success 14
Shared Value is About More than Redistribution, and Can Include Many Aspects of Company Performance Shared Value IS NOT Shared Value must GO BEYOND Shared Value IS Philanthropy Compliance with regulation Government relations Community engagement Investments in community problems and deficits that lower operational costs or improve productivity Reputation management Adherence to International codes of ethics Personal values Community / social investment Collaborations Investments to improve the enabling environment for the business in the long term Solutions to societal issues in the surrounding communities that are scalable and selfsustaining 15
Opportunities for Shared Value Creation Are Present Across All Three Shared Value Levels in Extractives, but Most Are in Value Chains and the Local Enabling Environment Reconceiving Products and Markets Redefining Productivity in Value Chains Creating Enabling Local Environment Build local markets for shared water, energy and other utilities Improve local workforce capabilities Develop local suppliers Strengthen local health care systems Increase local emergency response capabilities Invest in shared infrastructure and logistics networks Develop local clusters to support the extractives sectors Promote broad-based economic and community development in the region 16
Description Anglo American s Water Reclamation Facility, South Africa Local community faces water shortages of 30-40 ML per day Anglo American developed water reclamation facility to treat acid mine drainage and provide drinking quality water at commercial rates Facility also used to treat water from BHP Billiton s closed mine, South Witbank Colliery Idea originated in the business; responsibility now shared with the social investment team Social Value Meets 20% of the community s daily water requirements Reconceiving Products and Markets Business Value Costs of reclamation facility operation are offset by 60% Generates 16 ML per day and supplies 80,000 people At mine closure, will produce 40-50 ML per day during peak rain season 15% of operating costs covered by treatment agreements with BHP Billiton 17
BP s Local Staffing and Content Program in Baku, Azerbaijan Redefining Productivity in Value Chains Description BP opened an enterprise center for local SMEs Focused on areas where local contractors could improve capacity quickly Goal to increase supplier access and capacity at the local, regional, and international levels Idea originated in the social investment team; now responsibility shared with the business Social Value Over 1,000 firms participated in the program, with 121 graduating from programs to close competency gaps Increased jobs, skills, and investment Companies have won contracts worth $335M to BP and others Business Value Reduction in supply costs Development of specialized local skills and reduced reliance on expatriates Improved relations with local businesses 18
Description BHP Billiton s World-Class Supplier Program, Chile Creating Enabling Local Environment BHP Billiton invested USD $50 million over 4 years in a supplier development program Collaboration with Government of Chile, NGOs, and non-mining companies Goal of creating 250 world-class mining suppliers with export potential by 2020 Originated within the business and the social investment team jointly Social Value 36 suppliers engaged with combined sales of $400 million Over 5,000 people employed by participating companies Business Value Estimated NPV of $121 million in cost savings Drove Capacity improvements in energy and water use 43 innovation projects focusing on water, energy, health, HSEC, human capital, and operational efficiency 19
Initiatives that Create Broad-Based Economic Development in Communities Are Just Beginning Given the long-term nature of these investments, examples are work in process Initiative Foundation for Partnership Initiatives in the Niger Delta (PIND) Newmont Ahafo Development Foundation (NADeF) Description Chevron invested $50M in PIND, and leveraged approximately $50M from USAID and other development partners, to development new market opportunities and local solutions to core social issues in the Niger Delta region To date, PIND has reached 10,202 direct beneficiaries, trained 5,051 people, created 432 jobs and supported 93 local businesses Newmont partnered with 10 local communities, local and regional government and other civil society organizations to support community development programs around its operations in Ghana The goal is to create economic development by building governance and decision-making capabilities in local communities Pacific Rubiales Agrocascada Program Pacific Rubiales is providing treated waste water from its process for irrigation in developing the palm oil sector in a region of Colombia The project is designed not only to strengthen a growing cluster but support reconstruction efforts after decades of violence 20
New Stakeholder Roles and Relationships The focus on social impact unites the goals of companies, NGOs, and government Shared value fosters new relationships between companies, philanthropists, NGOs, and government in addressing social issues Governments NGOs Traditional Roles Tax and regulate business; operate social programs Receive grants to deliver social services; hold business accountable New Roles Make platform investments; support shared value strategies; co-invest and convene collaborations; regulate to encourage shared value solutions Partner in implementing new shared value business models Philanthropists Companies Donate to charitable causes Donate to charitable causes or ESG programs Partner with companies and NGOs to catalyze shared value initiatives Partner with NGOs and government to initiate and scale shared value strategies Partner with other companies to leverage impact in shared value 21
Addressing Barriers to Shared Value Can Allow a Company s Portfolio to Evolve to a Set of Activities that Enable and Create Shared Value Philanthropy Corporate Social Responsibility Shared Value Fund development of health clinics in rural communities surrounding company operations Partner with NGO to develop community-wide HIV/AIDS program Start a comprehensive HIV/AIDS program that measurably reduces workforce mortality and creates improved productivity and retention Improve access to capital, market data, and business training to local micro-entrepreneurs Provide management training and market connections for local suppliers Support research on regional economic development opportunities Build a cluster around the company Take a leadership role in driving broad-based economic development in the region by connecting regional players to business operations As local circumstances improve and opportunities increase, activities can evolve from mainly philanthropic to CSR-driven to shared value 22
Why Aren t More Companies Moving Toward a Shared Value Approach to Social Engagement? 5 Challenges Impede Shared Value Creation 1 Organization: Structures, reporting lines, incentives, and measurement systems do not incorporate societal issues 2 Measurement: The full long-term benefits often are not incorporated into operational planning 3 Replication: Strong examples of shared value are difficult to replicate in other geographies 4 Collaboration: Companies are reluctant to engage in collaborations a critical tool for achieving shared value 5 Government Intervention: Governments can either inhibit shared value via regulatory or tax disincentives, or miss opportunities to accelerate shared value 23
There Are Five Key Enablers in Moving to Shared Value Strategies Establish Social Purpose Define Social Need Measure Shared Value Create Supporting Org Structure Co-Create with External Stakeholders Define a social purpose that links societal input and business success Embed that link into shared value company strategy Understand underlying social conditions and how to address them Measure progress against both business and social outcomes Adapt organizational structure, reporting lines, processes, and incentives to encourage shared value approaches Enlist external stakeholder partners to help address community challenges These elements are mutually reinforcing 24
Join a Global Community of Shared Value Professionals Communities of Practice Consulting Affiliates Market Intelligence Shared Value Advocacy Shared Value Leadership Summit: May 13-14, 2014 in New York City Please visit www.sharedvalue.org/2014summit for details and to request an invitation 25 sharedvalue.org
26